Blended Finance and the Climate

Blended Finance and the Climate

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From 1760 to 1840, the Industrial Revolution changed the landscape of this planet. Even after over 180 years, the stratosphere is still shaken from its repercussions. After discovering carbon-emitting fossil fuels as a source of energy, factories and vehicles have ratcheted up the carbon emissions in the past two centuries. Consequently, humans have contributed a whopping 1.5 trillion tons of carbon emissions since the start of the Industrial Revolution. And the number will keep rising if nothing is done, especially from a financial standpoint. A second wave of a ‘technological revolution’ seems to be on its way, and if global financial drawbacks in the climate sector are left unrectified, the Earth might soon become uninhabitable for humans. 

The Broken $100 Billion Promise

At the 2009 Copenhagen Conference, wealthy countries agreed to channel $100 billion a year to underdeveloped countries, especially those struck by carbon emissions from wealthy countries, to help them minimize its impacts. This pledge was to be completed by 2020, one that, upon completion, would heavily reduce the burden on underdeveloped countries. They would use these funds to focus on more carbon-efficient methods of production in industries, fuel-efficient vehicles and the use of alternative fuels. 

According to the Organization for Economic Co-operation and Development (OECD), by 2020, the world’s richest countries had only provided $83.3 billion in total to poorer countries, falling $16.7 billion short. Falling short of funds will only intensify the impacts on developing countries, which could have severe economic and environmental repercussions. 

Unequal Distribution

Funds provided by wealthy countries were supposed to fund two things – mitigation projects to clamp down greenhouse gas emissions and adaptation projects to help people (especially from underdeveloped countries) to adapt to the changes in climate. However, only $20 billion went to these adaptation projects – less than half of the funds for mitigation projects. 

Blended Finance

According to OECD, by 2019, only $15 billion out of $80 billion came from the private sector – around 18.75%. It is crystal-clear that the reason why funds were insufficient was the lack of private financing. To add salt to the wound, the UN estimates that developing countries already need $70 billion per year to cover adaptation costs, and will need $140 billion–$300 billion in 2030. To put things into perspective, wealthy countries around the globe could only gather $2 billion for developing countries from 2018 to 2019. $70 billion looks like a far cry right now – unless the private sector steps in significantly. 

Blended finance is the perfect solution to insufficient climate funds. Blended finance is defined as the strategic use of development finance for the mobilization of additional finance, especially from the private sector towards sustainable development in developing countries. According to the World Economic Forum, the International Finance Corporation (IFC) has mobilized a record $7.6 billion in climate financing. However, the IFC themselves has recognized that developmental financial institutions like them will be helpless without the help of institutional investors (that have 900 times more funding than such developmental financial corporations) – with special focus on the private sector. If the use of money can be optimized from developmental banks, philanthropies, institutional investors and the private sector, emerging economies can be decarbonized at a rapid rate. 

However, normally private investors will often shy away from certain projects or markets because of specific risks that can’t be well managed. This is especially true in developing economies, which still have extremely volatile markets. Private funding thus gets narrowed due to the fear of heavy losses in investments. Blended finance solves this issue by making use of small amounts of concessional donor funds to mitigate specific investment risks such as market failure in certain economies. This rebalances the risk-reward equation for pioneering investments, attracting investors who could make profits on their investments and providing private financing simultaneously. 

The World Economic Forum states that IFC helped finance a 100-megawatt solar power plant to put Uzbekistan, one of the most energy-intensive economies in the world, on the path to sustainable energy production. As part of the $110-million financing packaging, the Canada-IFC Blended Climate Finance Program provided a loan of $17.5 million on concessional terms, with IFC matching the same loan amount on the same terms. Blended finance helped mitigate the risks of this project in a sector with a new and untested regulatory framework, and made a climate-friendly project possible that otherwise wouldn’t have been commercially feasible. 

If private financing was scaled up through blended finance, it could fill a large portion of the $16.7 billion deficit and could make the $70 billion per year target commercially viable.

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